Planning for succession? Don’t make this mistake

Business owners who intend to transition their companies to family or staff members may find themselves in an unenviable position. The succession process requires the owner to consider two different, but inextricably linked, facets of the business: ownership and management. Often business owners try to deal with these areas simultaneously – and although this approach may seem like the fastest and easiest way to make decisions – it carries significant risk.

In working with family businesses on succession planning, we have determined that there is merit in evaluating ownership and management separately. Here's why:

Making changes to these two areas can be complex, and will involve managing the expectations and personality differences of multiple internal and external stakeholders.

By dealing with these two areas separately, you can reduce the pressure of decision-making for all parties and address the underlying issues of each aspect with more clarity and objectivity.

Decisions about future ownership and management may influence each other, but should not necessarily determine one another. This is especially important as a change to one area may not occur at the same time as the other.

In developing a timeline for dealing with ownership and management changes separately you can build yourself a useful structure for making potentially difficult decisions. The following are some of the key considerations when looking at changes in ownership in this context:

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Is it possible for the existing owners, on a personal, emotional and relationship level, to differentiate between potential ownership and management changes arising from succession?

Should ownership and management be transitioned along different timelines?

Is it feasible to transfer one and not the other?

To what extent, and for how long, does the owner want to maintain control and responsibility over important decisions and be exposed to business risks?

What is the most appropriate way to decide who will manage the business during the succession process and thereafter? Is any outside assistance required, either temporarily or permanently?

Will the new CEO or general manager be chosen on the basis of ability, family membership or a combination of the two?

Will a change of ownership cause any problems for long-term employees or senior management?

Are the owners of the business willing to transition ownership only, management responsibility only, or a combination of the two? In other words, is it possible for the new majority owner to have a lesser management or leadership role in the future than a minority owner?

Regarding readiness to assume management responsibility, the following questions should be asked:

Considering the future needs of the corporation and the influences from society, the economy, your industry and globalization, what skills are required to ensure a sustainable and profitable corporation? Are you willing to start with a blank slate when considering this rather than the current situation?

Do the family members in the business possess the skills and experience to manage the business going forward? Are you as the owner willing to accept that you may be biased in making this assessment?

Do family members need help managing the business now or in the future, even if they end up owning the majority of shares? How will this be provided, and who will be providing it?

What limits should be put around the management roles of family members in order to protect the ownership of owners that are not involved in the business on a day-to-day basis?

What would be the milestones to ensure that the right people have the right skills at the right time? Will this require internal or external learning, and how will this be paid for?

In what way may transferring ownership to people who are not yet ready jeopardize the ability of those taking on increased management responsibility to learn new skills?

What kind of management is required for the future? Will the company benefit most from someone that can grow or maintain it?

What training is required for new management to develop the skills of the current owners and the commensurate experience?

The above questions provide a road map for securing the future of a family-owned business. Addressing the areas of ownership and management separately ensures that solutions are more workable and more likely to lead to a successful transition.

Eben Louw, CA,is a partner in MNP LLP's Abbotford office. In addition to delivering a wide range of accounting services, Mr. Louw works closely with clients to offer strategies for succession and long-term business planning. He has also acted as panel member and presenter on succession-related topics to various business groups.

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